Our thoughts on recent events

OPEC’s push gets a Trump punch

OPEC’s decision to bring down compliance to 100% might have averted significant inventory drawdowns, but Trump’s push against Iranian oil is a threat to the global oil market, as OPEC’s spare capacity will be reduced to less than 1mbpd.

The United States (US) unilateral withdrawal from the Iran Nuclear Deal in May has raised supply concerns in the oil market, but the decision by OPEC producers on June 22nd to increase production and to adhere 100% to previously agreed production levels will most likely avoid a supply crisis.

Iran and Venezuela oil production (mbpd)

The cartel’s decision has abated a possible huge inventory drawdown

As Venezuelan production is expected to gradually shrink below 1 mbpd by the end of 2018, the absence of any increase in production by other OPEC producers would have led to a supply shortage towards the end of the year, especially given that US sanctions will squeeze Iranian production.

Changes in global oil stocks (mbpd)

Earlier, US sanctions were expected to squeeze Iranian production by a maximum 0.9 mbpd. In such a situation and in the absence of the recent OPEC deal, the market would have seen a 1.6 mbpd drawdown in inventories (equivalent to 30-35 VLCCs demand) in the fourth quarter 2018. However, as the cartel members (excluding Venezuela and Iran) are targeting to increase OPEC output to 32.7 mbpd, the oil market should be well supplied, abating enormous inventory drawdown.

OPEC production versus Call on OPEC crude (mbpd)

World does not have enough crude to meet Trump’s demand

That said; the recent US warning to its allies and partners to completely end their Iranian oil imports by November poses a serious threat to global oil supply. Major Asian buyers of Iranian oil, including Japan, India and South Korea, have already signaled that they might stop imports of Iranian crude if US sanctions are imposed. Iran exported 2.62 mbpd of crude oil and condensate in 2017 and if all importers of Iranian crude stop importing crude from Iran it will wipe out almost all the spare capacity of OPEC, a situation rarely seen in the history. However, since the call on OPEC crude is expected to decline in 2019, OPEC’s spare capacity will not erase entirely, but it will be below the 1 mbpd mark, even if Iranian exports come down to zero in 2018-2019.

A complete halt in Iranian exports would effectively mean scrapping of the nuclear deal, which is highly unlikely as all the signatories of the deal excluding the US want it to continue. China has already made it clear that it will continue to import Iranian crude and there is a fair chance that the Asian giant might increase Iranian crude imports if it gets a price discount from Iran. Similarly, Turkey is also expected to keep its imports of Iranian crude intact. On the other hand, European Union and Asian buyers are likely to negotiate with the US for some exemption in order to avoid any supply crunch in the oil market and a surge in prices towards $100 per barrel.

In Drewry’s opinion, the likely decline in Iran’s crude exports should be around 1 mbpd, creating a supply gap which is manageable by OPEC and non-OPEC producers. This in turn will give some respite to the tanker owners, as there will be no significant impact on global oil trade and tanker demand.